Progressivism in Decline

The early twentieth century saw the triumph of Progressivism. By the time Theodore Roosevelt assumed the presidency following the assassination of William McKinley in 1901 Progressive doctrines had become dominant in elite circles. As Martin J. Sklar shows in his monumental Corporate Reconstruction of American Capitalism 1890-1916, the key debate in the Progressive era was among three or four schools of thought. Both today's conservatism and today's liberalism are offshoots of those schools of thought. The first school was small business populism which held that all big business was undesirable. In response to this movement, the US Supreme Court held for about 15 years that all business combinations were in violation of the Sherman Anti-Trust Act beginning with the 1897 decision in United States v. Trans-Missouri Freight Association. Progressives were troubled by this decision because they believed that only unreasonable restraints of trade should be illegal under the Sherman Anti-Trust Act, and that was the opinion of the law's authors. In response to this decision, Progressives held that corporations should be permitted to exist but should be regulated. The most aggressive advocate of regulation was Theodore Roosevelt, who evolved into the position that the state should largely control and set policy for corporations (Sklar provides rich detail about Roosevelt's ideological evolution). In contrast, William H. Taft, who succeeded Roosevelt as president in 1908. Taft believed in very minimal regulation of the trusts with aggressive enforcement of the Sherman Anti-trust Act through the courts. This was so following the Supreme Court's Standard Oil decision, which broke up Standard Oil (arguably to satisfy populists and the left) but overturned the Trans-Missouri decision and reinstated the common law interpretation of the Sherman Act that only unreasonably uncompetitive trusts are illegal. Thus Taft's Republican position was that corporations ought to be minimally regulated with aggressive enforcement of the anti-trust law to satisfy small business interests, anti-union small manufacturers and the left. Roosevelt might have agreed with Taft's approach during his presidency, but had veered to a highly statist viewpoint and so ran against Taft as the Bull Moose candidate in 1912. The third view, that of Democrat Woodrow Wilson, was that big business was natural but there needed to be a combination of meaningful regulation (but less than the Republican Roosevelt advocated) but also enforcement through the courts. Taft can be viewed as the progenitor of today's Republicans while Roosevelt can be viewed as the progenitor of today's "progressives". Both were Progressives in the early twentieth sense, so today's politics can be viewed as a battle between forms of Progressivism. By 1900 there was no serious advocate of laissez faire and this was not part of any significant conservative movement. Nor did the advocates of laissez fair in the late nineteenth century grasp the arguments of the twentieth century Austrians, Friedman and Schumpeter. Thus, today's free market economics, while relying on marginalism that John Bates Clark, an advocate of the kind of big business statism that the Progressives adopted, as well as crucial insights of Smith and Ricardo, was a twentieth century develop and appeared after progressive-liberalism, the conservative Progressivism of Taft, the evolutionary Progressivism of Wilson and the radical Progressivism of Roosevelt.

That said, there was a devolution of Progressive ideas that occurred in the twentieth century's subsequent 8 decades. Progressivism was largely concerned with molding of the system of regulation of business. Theodore Roosevelt was most concerned with balancing labor and corporate interests, and all the Progressives were interested in developing a system of business regulation and corporate enterprise that would be dynamic and productive but would not permit excessive power to corporations. However, the Progressives were overly impressed with the size and power of contemporary business. They did not realize that technology had the potential to overturn large firms fairly quickly. Thus, they implemented systems of support and structure that served to protect the very power of big business that they claimed to wish to minimize. The establishment of regulatory systems raised entry costs; the establishment of the income tax created barriers to capital formation among the poor and small business interests; the establishment of the Federal Reserve Bank facilitated a monopoly of capital by big business, commercial banking and the investment banks that tended to foreclose entrepreneurship; and the labor regulations that Roosevelt, Herbert Croly and other Progressives advocated that saw much of its realization later in the 20th century, also created entry barriers and high fixed costs for small business. The result was excessive protection to big business.

The model of manufacturing that the Progressives reinforced was mass production or continuous flow, in the terminology of Joan Woodward. This model was characteristic of the late nineteenth through the mid twentieth century. It involved a degree of technology and managerial sophistication, but it relied on large scale production runs. This kind of technology requires consistency of output. Its apex was the Model T Ford, which had little variation and could be produced at low cost but had poor quality. The American regulatory system thus geared itself to protecting the modernist, mass production model by allocating credit; at various times via protectionism; and by creating entry barriers.

Franklin D. Roosevelt's New Deal of the 1930s reinforced the Progressive model in a number of key respects. First, it established a modernist labor regulation system which assumed that labor unions that required large bargaining units would represent employees. In response, the industrial labor unions of the Congress of Industrial Organizations was formed. In short order following the National Labor Relations Act the number of unionized workers more than doubled and by 1945 about 35% of the workforce was unionized. The NLRA labor system assumed that unions would face the same modernist model that the Progressives thought firms would eternally face: large work units characterized by low skill workers who could be organized in large groups by industrial unions (unions that represent all the workers in the plant) such as the United Auto Workers union. However, this model was not to materialize.

The chief problem facing union organization is the same as the chief problem facing the Progressive regulatory regime. Within 40 years of the establishment of the Progressive regime Toyota Motor Company in Japan began experimenting with a process known as lean production. Taiichi Ohno, Toyota's executive vice president for manufacturing in the post-World War II era and the creator of lean production says that he worked on the lean production or kanban model for 15 years, from the late 1940s until the early 1960s, before Toyota finally iron out the process. The important point about lean manufacturing is that it inverts the assumptions of modernism. It depends on producing one unit at a time; it depends on teamwork; it depends on highly committed workers who cannot be in a conflictual relationship with the firm and who need to feel secure in their jobs; it emphasizes not mass production but coordination; and it views the factory as a series of supermarkets where line workers are consumers who obtain just enough inventory from the next lower level of the production process. Thus, information becomes critical, and highly trained workers who are flexible are equally crucial. Likewise, single units are produced at a time.

The characteristics of Ohno's lean manufacturing are amplified by the ideas of Edward I Deming, who was also appreciated in Japan before being recognized in the United States in the 1980s and 1990s. Deming argued that quality is a process rather than an outcome; that quality depends on both management and employee; that teamwork is crucial; that systems are the foundation of quality and that employees need to be trained and have long term relationships with their firms. Decision making is profound and subtle, and often criteria used to improve processes are impossible to communicate to outsiders. They depend on the knowledge that only workers possess. Therefore, the assumption of Progressivism that rational knowledge is fundamental to good management is overturned by quality management processes. No expert can replace the profound knowledge of simple line workers who are familiar with machinery.

While these management developments were occurring, there were no changes in the Progressive and New Deal regulatory formation. Indeed, quite the opposite. In 1931 Franklin D. Roosevelt abolished the gold standard, which released banking from market discipline. Banks could lend entirely on the basis of personal relationships rather than market performance, and firms could be rewarded with capital infusions regardless of performance. At the same time, American firms did not suffer from competition in part because of World War II and in part because firms had not yet reached the scale sufficient to compete with the American firms. However, continued American ascendency would have depended upon competitive quality developments; rapid innovation; and a market-drive economy, and these patterns were increasingly absent from the economy. Small businesses had increasing trouble forming because of high marginal tax rates, regulation and inability to obtain credit, which was locked by the Fed and given to connected large banks and their client large corporations. The corporations, such as General Motors, felt no need to compete with smaller foreign firms that were still learning how to manufacture. This began to end in the 1950s, when Ford built the Falcon which imitated Volkswagons, but American manufacturing firms had little concept of lean manufacturing or TQM until these processes were well familiar to Japanese firms. Thus, American firms lost their ascendency due to the protective, stable system that the Progressives and the New Deal had created; the lax management in fields like steel and autos that flourished because of the stable system and lack of competition; and the inability of the US government which oversaw the Progressive regulatory model to understand or to anticipate the fundamental changes in production knowledge that the Japanese were accruing.

Thus, the early twentieth century saw the formation of a Progressive regulatory model that aimed to adjust the economy to the rise of big business. But the system the Progressives created did not contemplate the possibility of progress. The Progressives could not foresee that Franklin D. Roosevelt would ratchet up the degree of regulation and take a number of steps that inhibited the formation of new businesses. But the Progressives also did not grasp that the big business system of large scale mass production was only a step in the development of industry, a process which will continue well beyond this and the next centuries.

Progressivism's rigidity and inability to attract experts with the requisite ability to understand developments like lean production was only part of the reason for the inability of the Progressive model to anticipate progress. The model of Progressivism is based on a faulty concept of planning. It contemplated the existing business structure as capable of innovation and that scale rather than process and new ideas were the key variables. AS the twentieth century progressed, though, it was new ideas, the ability to anticipate change and the ability for nimble, often small firms, to cooperate in innovation that mattered most. Yet, such firms are crippled by the banking and credit systems, which allocate credit to secure risks such as large corporations and real estate developers. Thus, the American economy has seen a frenzy of large retail and home building but considerably less innovation in a wide range of fields outside of electronics and telecommunications that might have occurred.

Moreover, there are a number of artifacts of Progressivism that the Progressives themselves attribute to markets, but can do so only by claiming that the Progressive/New Deal model had not been established in the first place by Taft and Franklin D. Roosevelt. First, the skewness in accessibility to credit has facilited a higher degree of income inequality than would exist in a market economic system. This has occurred because the Federal Reserve Bank has inflated asset levels, notably the stock and real estate markets, at the expense of wages. Second, relatively high paid manufacturing jobs have left the United States because of financial manipulation by the Fed, most directly the propping of the value of the dollar through encouragement of foreign governments to hold United States bonds. Third, the stimulaton of the stock market coupled with corporate emphasis on stock options has made executives sensitive to low-risk means of increasing short term profits, which would suggest moving plants to Mexico and overseas. This was done while the Progressive system provided loan guarantees to Chrysler and various protectionism measures to the automobile firms in the 1970s and 1980s.

Thus, Progressivism is responsible for US manufacturing firms' lack of emphasis on quality management, which they felt little pressure to adopt during the 1960s and 1970s, and the rewarding of corporate executives despite their firms' poor performance because of outsourcing. Indeed, Progressivism devolved into a system of special interest brokerage which ensures that little of benefit occurs on the public's behalf; that large firms benefit at the expense of small; and that the public is harmed by the Progressive regulatory regime.

Of Market Bottoms and Economic Literacy

This past Monday my friend Howard S. Katz has called a market top in gold and commodities and an incipient intermediate term bull market in stocks. This is because, he argues, the recession fears and investment banking losses have caused a primarily psychological market correction and the Fed's injection of large amounts of liquidity (counterfeit paper money) into the economy will stimulate a new stock market bubble. It will likely be of shorter duration than the most recent 5 year run-up, in Howard's view. Howard has gone long on several construction stocks which had quite roller coaster ride. He bought on Monday and the stocks went up 10 to 20% in a single day on Tuesday. On Wednesday they fell a similar amount, on Thursday they rose a similar amount and on Friday they were down slightly. Should Howard's prediction of a bottom this week turn out to be true, these stocks will have risen in the 100% range.

Financial drama aside, my business seminar class today surprised me. Not a single student in the class had heard of David Ricardo's theory of comparative advantage. It is difficult to discuss business, trade and current events when college graduates in business programs lack a modicum of economic literacy. I am curious as to whether the students' lack of knowledge of the most elementary theory of trade is due to ideological bias in their education; their failure to do their homework; or some other cause.

Why Democrats and Republicans Are Mostly the Same: the Roosevelts

The two Roosevelts were founders of post-modern progessivism. Theodore Roosevelt was a Republican who believed in a statist corporate system. He became the most radically left-wing of all American presidents, including his cousin Franklin. Roosevelt believed that corporations should be licensed to engage in interstate commerce and that the federal government should tell firms what prices to charge and how to function. Although his ideas were too extreme, and ultimately were rejected by his appointed successor, William H. Taft, the model of a state-regulated economy was the product of the Progressive Republicans and of Roosevelt's presidency. Today, Democrats are calling themselve Progressive, but the fact is that Progressivism was a Republican more than a Democratic movement. Wilson was a Progressive because he had to be. His Mugwump background was consistent with a belief in freedom and private enterprise, and although many Mugwumps, including Theodore Roosevelt, had turned to statism in the Progressive era, Wilson did so in response to political pressure.

The Republican Party, then, was not a small government party in the twentieth century until Barry Goldwater ran on those views in the 1964 presidential election. The Republican Party included a minority of small business advocates (who were NOT libertarian in philosophy-- this was the group that had fought for the Sherman Ant-trust Act and the Interstate Commerce Commission in the 1880s). It included a minority of laissez faire advocates in the late 19th century, the Mugwumps, but but their laissez faire orientation had diminished by 1900, and they were too few in number to be of any importance until Goldwater, who lost by a landslide in the federal election.

The laissez-faire Republican Mugwumps of the late 19th century were not loyal to the Republican Party because the Republicans were indifferent to laissez faire and in their minds good government (civil service) principles. The laissez-faire Democrats in the late 19th century were known as the Bourbon Democrats, and included President Grover Cleveland. But these groups were small even in the 19th century (certainly less than 5 percent of the electorate). Laissez faire was not the philosophy of late nineteenth century Americans, many of whom were immigrants who benefitted from political machines in the cities and had no understanding of the economics of Smith or the opinions of EL Godkin. Thus, it is impossible that laissez-faire conservatives reflected even a small fraction of the Republican Party by the 1930s, when Roosevelt was elected.

Those conservatives who saw themselves adversely affected by the Franklin Roosevelt policies (at least in the public relations sphere) reaped what they had sown. They had not funded opposition to Progressivism in the early twentieth century, and there was no intellectual foundation to fight the New Deal in the 1930s.

Thus, while the founder of the modern Republicans was the Progressive Theodore Roosevelt and his protege (and more conservative but still rather statist) William H. Taft, the founder of the modern Democrats was the social Democrat Franklin D. Roosevelt, who adopted many of the ideas of Herbert Croly with respect to legislation.

Thus, the debate of the twentieth century has been largely among progressive Republicans, who follow the Taft position, and the progressive Democrats, who follow the Roosevelt position. Both are descendents of Theodore Roosevelt, who may be viewed as the founder of twentieth century ideological debate.

John Lukacs has argued that the dominant ideology of the twentieth century was national socialism. Stalin advocated "socialism in one country" as did Mao, while Hitler coined the term Nazi-Sozi. Progressivism is the American strain of the national socialist movement, and most Americans believe in it. The twenty or thirty percent of Americans who do not must clarify a few points among themselves.

1. The difference between national socialist Americans and those who believe in "none of the above" is that "none-of-the-above" Americans believe in a limited state. That should be the glue that binds them. Other issues distract from the need to restrain state power, which is the chief threat to freedom, progress and economic gain. These are difficult to withstand, because nationalism is a highly emotional cause.

2. Many of the supposed arguments between conservatives and the left are spurious. They are instituted by statists on both left and right. Both the statist left, in its radical as well as liberal forms, and the right, in its converstive talk-show form, are progressive, national socialist movements, even though the right claims to be for small government (but of course belies those claims when elected). Those who would change in the direction of less government have to change habits of thought. That means asking what others who believe in reductions in state power are least likely to believe and avoiding emphasis on those issues for political purposes.

3. Advocates of "none of the above" ought to think of ways to include each other, not to exclude each other because of shibboleths, code words, racial divides, or side issues that serve only to distract.

4. It is a mistake for libertarians to believe that big business Republicans and neo-conservatives are on their side. There is no alliance between those who do not believe in left or right wing national socialism and libertarians, small scale liberals and those who oppose the extension of state power and favor economic development. The conservative right is and always has been as statist as the radical left. The libertarian right has been bamboozled much as the libertarian left has been bamboozled by Stalin and Mao.

Progressivism and Globalization

In passing the Federal Trade Commission and Clayton Acts, which supplemented the Sherman Anti-Trust Act and the Interstate Commerce Commission, Congress established a system of federal regulation of business. The rationale for federal regulation as opposed to laissez faire competition was self contradictory. The chief argument was one that primarily served capitalists' interests: over-production and the need for liquidity in credit markets (which was accomplished via the Federal Reserve Bank and ultimately the abolition of the gold standard in 1933). However, the chief concern in the public mind was unreasonable restraints of trade, "bad trusts", who harmed the public via monopoly restrictions on prices. Note the contradiction: big business constitutes monopoly power which restrains production to raise prices; but the chief problem according to Progressive advocates of regulation of business was overproduction and too-low prices.

The Progressives also argued that a central government power was necessary to eliminate harmful competition or irrational decision making among some big businesses. But the Progressive argument begged the question. If managers of big businesses might be irrational, why might not officials of the Federal Trade Commission or Interstate Commerce Commision also be irrational, greedy, power hungry or unreasonable? Was Theodore Roosevelt necessarily more rational or moral than John D. Rockefeller? What would have made him so, a halo? Would he have made a better manager of oil companies than John D. Rockefeller was? What evidence was there that government bureaucrats or experts were more rational or effect at managing large concerns, or could contribute meaningfully to the management of the firms?

In today's world, a century after the Progressive era, firms are no longer national in extent, purpose and often allegiance. They are global. Competition is global. There is no agency to supervise the global firms. Toyota, Mercedes and GM all compete without the benefit of government guidance. Yet there is no monopoly power and there is no overproduction. These were imaginary problems claimed by primitive ideologues with little knowledge of how economies work.

The model of management that the Progressives advocated that experts in government agencies can provide management help to large firms is woefully out of date. The chief knowledge of importance to business is, as Hayek pointed out, on the spot. It is specific knowledge concerning production and quality improvement processes. It is not abstract or theoretical and it is not found in business schools or economics departments.

Taiichi Ohno's model of lean manufacturing and continuous production, like Hayek's concept of on-the-spot-information, suggests that the modernist view of expertise as generalizable knowledge is inappropriate to the post-modern world. Knowledge evolves from production processes, which dictate process improvements through specific constraints and requirements that differ from firm-to-firm. The idea that an expert with a Ph.D. can tell firms what processes to use or how to improve quality is as antiquated as the idea that government inspectors are necessary to ensure good quality meat.

The phenomena of big business was striking to the popular mind of the late nineteenth century. The spectacular rise of large firms such as Standard Oil, which were protected by high tariffs and likely would not have grown to the extent that they did without the tariffs impressed people who grew up toward the end of the era of the horse and buggy . The rise of large firms, and the tariffs and other government support for their rise, led to public concerns about monopoly, excessive power and unreasonable competition. But the public fear of large corporations did not reflect an understanding of their vulnerability to creative destruction. The owners themselves were afraid at the time and repeatedly complained about lack of profit, overcompetition and destructive competition. But this was very much in the public interest. Nothing should make the public happier than a capitalist who makes no money because prices are drive down by competition. But the public was unable to disect the pro-capitalist gist of the Progressive argument.

The left of the late nineteenth century, like the left today, is a pro-centralization movement, and therefore it is closely aligned with, despite its hatred of, big business Republicanism. The Progressives favored large scale firms managed by government bureaucracy because they believed that the highest development of industry had occurred in the early twentieth century. The spectacular growth of the large firms seemed to them the pinnacle of human economic achievement. They could not, as we cannot, envision future management and technological developments. To them, the oil mining technology of Standard Oil and the Ford assembly line were humanity's ultimate triumphs. These advances were important, but are primitive by today's standards.

In order to achieve these breakthroughs, capitalist free market competition was essential to innovation. Without "overproduction" cost saving technology would not have been the subject of creative thought. Without economic stress capitalists would not have supported the invention of new products that created competitive advantage (in 1980s lingo). But the Progressives could not see that the advance of capitalism was a dynamic process and the technology of the 20th century by the standards of the 24th century (assuming that progressivism does not prevail) will seem even more backward and primitive than the technology of the 16th century seems to us today.

Ray Kurzweil has argued that technology advances at ever quicker rates. Kurzweil's argument depends in part on Moore's law, which does not seem to be materializing now and assumes a rate of advance that is quicker than past and recent rates by orders of magnitude. One need not buy into Kurzweil's singularity argument to believe that future advance will be quicker than past advance. Technological advance depends on interaction and creativity. Informationi technology has increased the rate of interaction, so the rate of advance has been increasing. But much of the advance has been in information technology. Therefore, we can expect escalating rates of advance. This has occurred despite attacks on the flow of information. Much of the twentieth century world was darkened by dictatorship: communism covered China and Russia and a corrupt socialism dominated India. National socialism dominated the world's political systems, and progressive regulatory systems, income taxation and inflationary Federal Reserve policies that allocate credit away from innovative firms toward financial firms hammered at progress in the United States. Despite the Progressive assault on human progress, except for the period of high tariffs, depression and war from the late 1920s through the 1950s, the twentieth century still saw progress, although not at the rate that could have been, and perhaps slower than the late 19th century rate, which saw less circulation of information for less intervention.

The economy has become more global and competition is no longer "managed" (like a child who believes he is a policeman, so Theodore Roosevelt believed he could manage the economy) yet overproduction is not a problem, nor is unfair competition.